Retail Traders Win - Your Consistent Returns from the Stock Market

The Promise vs. The Reality

In 2019, Charles Schwab eliminated trading commissions, triggering an industry-wide race to zero. Suddenly, trading stocks became "free." Robinhood, E-Trade, Webull—everyone offered zero-commission trading. It felt like a revolution. But here's the uncomfortable truth: When a product is free, you're not the customer. You're the product being sold. Welcome to the world of Payment for Order Flow (PFOF)—a $2.5 billion industry built on selling your trades to the highest bidder.

What Is Payment for Order Flow?

Payment for Order Flow is when your broker gets paid to send your trades to specific market makers instead of letting them compete in the open market. Here's how it works in practice:

The Traditional Model (Pre-2019):

You place an order to buy 100 shares of Apple
Your broker sends it to the NYSE or NASDAQ
Your order competes with everyone else's in the public market
Best price wins
You pay your broker a $7 commission

The PFOF Model (Now):

You place an order to buy 100 shares of Apple
Your broker sends it to Citadel Securities (because Citadel pays them the most)
Citadel trades with you directly from their own inventory
Citadel gives you a price that meets regulatory minimums (but not necessarily the best available)
Citadel pays your broker $0.002-0.005 per share for the privilege
You pay "zero commission" (but got worse execution)

The kicker: On a 100-share trade, Citadel pays your broker maybe $0.50. Multiply that by millions of trades, and you get billions in revenue.

The Three Players in This Game

1. You (The Retail Trader)

Think you're getting "free" trading
Actually getting sold to market makers
Receive execution that meets minimum standards but isn't necessarily best

2. Your Broker (Robinhood, E-Trade, Webull, etc.)

Advertise "commission-free" trading
Make billions selling your order flow
Have a conflict of interest: route orders to whoever pays them most, not who gives you the best price

3. Market Makers (Citadel, Virtu, Susquehanna)

Pay brokers for exclusive access to retail order flow
Trade against your orders from their own inventory
Profit from the bid-ask spread on every trade

Why Market Makers Pay for Your Orders

Retail order flow is GOLD to market makers. Here's why:

1. You're "Uninformed"

Retail traders aren't front-running earnings reports or exploiting market inefficiencies. You're just buying Apple because you like iPhones. This makes you predictable and safe to trade against.

2. Low Risk, Consistent Profit

Since retail orders are less likely to be based on inside information, market makers can safely take the other side of your trade and profit from the spread.

3. Massive Volume

Millions of retail trades per day = massive cumulative profits, even at fractions of a penny per share.

In Q1 2025, Citadel Securities alone paid $388 million for order flow. They wouldn't pay that unless they were making significantly more.

What You're NOT Getting

When your order is sold to a market maker instead of competing on public exchanges:

No Real Price Discovery
Your order doesn't influence the public stock price. The market doesn't know there's demand at your price level.

No Competition
Only one market maker sees your order, not all potential buyers/sellers. You're in a private negotiation, not an open auction.

Hidden Execution
Your trade doesn't appear on the public tape until after it's done, with less transparency about what actually happened.

Worse Fills on Larger Orders
Market makers cherry-pick the profitable small orders. Large or complex orders get worse treatment.

The Real-World Example: How It Actually Plays Out

Public Exchange Route (What You Think Is Happening):

You want to buy Apple at $150.00
Order goes to NASDAQ
Gets matched with the best available seller at exactly $150.00
Trade appears on public tape immediately
Everyone sees there was demand at $150

PFOF Route (What's Actually Happening):

You want to buy Apple at $150.00
Robinhood sells your order to Citadel (Citadel pays Robinhood $0.002/share)
Citadel has Apple inventory, sells you shares at $149.99
Looks like "price improvement" - you saved $0.01!
But: Citadel bought those shares earlier at $149.97, pocketing $0.02/share
Your trade is reported to public tape later with minimal transparency

Result: Citadel makes $2 on your 100-share order, Robinhood makes $0.20, you saved $1 but could have gotten $150+ in a truly competitive market

The Regulatory Framework

PFOF is legal in the US, but heavily regulated:

SEC Requirements:

Regulation NMS: Orders must be executed at National Best Bid/Offer (NBBO) or better
Rule 606: Brokers must disclose their order routing practices quarterly
Best Execution Obligation: Brokers must seek best execution for customers

The Loophole:

"Best execution" doesn't mean "best price." It considers speed, likelihood of execution, and other factors. Market makers exploit this by giving you price that meets NBBO while still profiting from the spread.

Who's Buying Your Order Flow?

The Big Three Market Makers:

1. Citadel Securities

Paid $388 million in Q1 2025 alone for retail order flow
Handles over 40% of all US retail equity volume
The #1 destination for order flow from most major brokers

2. Virtu Financial

Second-largest market maker
Handles approximately 25% of retail flow
Together with Citadel, controls ~70% of retail order flow market

3. Susquehanna International Group (SIG)

Major options market maker
Significant equity order flow purchaser
Less visible but highly active

The Concentration Problem:

With just two firms controlling 70% of retail order flow, there's minimal competition among market makers. This concentration means less pressure to give you better prices.

Which Brokers Sell Your Order Flow?

Brokers That DO Accept PFOF:

Heavy Users:

Robinhood - Built entire business model on PFOF; makes ~$260 per $1M in order flow
Webull - Similar model to Robinhood
E-Trade - Makes ~$22 per $1M in order flow
TD Ameritrade - ~$22 per $1M in order flow
Charles Schwab - ~$22 per $1M in order flow
Ally Invest - Accepts PFOF
TradeStation - Accepts PFOF
tastytrade - Accepts PFOF

Brokers That DON'T Accept PFOF:

The Clean List:

Interactive Brokers (PRO accounts) - Uses Smart Routing, no PFOF
Fidelity Investments - Routes to exchanges, no PFOF on stocks
Vanguard - No PFOF on stocks and ETFs
Merrill Edge - No PFOF

Important: Interactive Brokers offers both LITE (PFOF) and PRO (no PFOF) accounts. Choose PRO if you want true best execution.

The IBKR Difference: Why One Broker Refuses to Play the Game

Thomas Peterffy, founder of Interactive Brokers, on PFOF:

"Brokers for the last 200 years have always tried to get people to trade more, because they used to get commissions. Now they get payment for order flow. It's basically the same thing."

How IBKR PRO Works:

You pay commissions: $0.005/share, $1 minimum
Smart Routing: Orders go wherever gets you the best execution
Direct market access: Your orders compete in the real market
Dark pool access: Often get mid-market fills better than public exchanges
Aligned incentives: IBKR's only incentive is to get you the best price (you're paying them directly)

The Math:

100 shares on Robinhood: $0 commission, lose ~$2-5 in worse execution
100 shares on IBKR PRO: $1 commission, save $2-5 in better execution
Net result: IBKR is actually cheaper for informed traders

The Robinhood Story: PFOF on Steroids

Robinhood deserves special attention because they've taken PFOF to an extreme:

The Numbers:

Makes ~$260 per $1 million in order flow sold
That's 10x what other major brokers receive
Generated $720 million from PFOF in 2020 alone

Why So Much?

The SEC investigated and found that Robinhood customers received significantly worse execution prices in 2016-2019 compared to other brokers. Robinhood's order flow was more valuable to market makers because they could extract more profit from it.

The Settlement:

In 2020, the SEC fined Robinhood $65 million for:

Misleading customers about order routing
Not seeking best execution
Accepting payments that weren't in customers' best interests

Translation: Robinhood sold you out for maximum profit.

The Global Perspective: Why Other Countries Banned It

United Kingdom: Banned since 2012

Reason: Conflicts of interest deemed unacceptable; protecting retail investors takes priority over "free" trading

European Union: Banned since 2026

Reason: Research showed customers received worse prices; the "free trading" benefit didn't outweigh execution quality loss

Canada: Partially Banned

Reason: Prohibited on Canadian securities; allowed only on US stocks where customers are informed

The Pattern:

Other developed markets looked at PFOF and decided the conflicts of interest and execution quality problems outweighed any benefits.

Only the US still allows it broadly.

The Hidden Costs: What PFOF Really Costs You

Small Trades:

Order flow sale: ~$0.50 per 100 shares
Execution quality loss: ~$2-5 per 100 shares
Total hidden cost: $2.50-5.50 per trade
Compare to: $1 commission on IBKR PRO

Large Trades:

1,000 shares: Potentially $20-50 in worse execution
10,000 shares: Potentially $200-500 in worse execution
For active traders, this adds up to thousands annually

The Research:

Studies show that for every $1 million traded, PFOF costs retail investors $10 in worse execution compared to brokers that don't sell order flow.

How Market Makers Profit While "Giving You Price Improvement"

This is the clever part of the PFOF model:

The Setup:

Public market shows Apple at $149.95 bid / $150.05 ask
NBBO (National Best Bid/Offer) = must execute between these prices

What Market Makers Do:

See your order to buy at market price
Sell you shares at $150.04 (technically "price improvement" of $0.01!)
But: They bought those shares at $149.96 earlier
Their profit: $0.08 per share
Your "savings": $0.01 per share

The Deception:

Yes, you got $0.01 better than the public ask. But in a truly competitive market with your order visible to all participants, you might have gotten filled at $149.98 or $150.00. The market maker's $0.08 profit came from information asymmetry—they saw your order exclusively.

The Timing Disadvantage

Beyond price, PFOF creates timing issues:

Order Flow Sale Process:

You click "buy" at 2:30:00 PM
Robinhood routes to Citadel (2:30:00.100)
Citadel evaluates order (2:30:00.200)
Citadel decides whether to fill or pass (2:30:00.500)
If Citadel passes, order goes to market (2:30:01.000)

Direct Routing:

You click "buy" at 2:30:00 PM
IBKR routes to best venue (2:30:00.050)
Order executed (2:30:00.100)

Result: PFOF adds latency. In fast-moving markets, this can cost you significant money.

The GameStop Saga: When PFOF Showed Its True Colors

January 2021 revealed the dark side of PFOF:

What Happened:

Retail investors on Robinhood drove GameStop price up
Citadel (Robinhood's biggest PFOF customer) had massive short exposure
Robinhood restricted GameStop trading
Conflict of interest: Was Robinhood protecting customers or protecting Citadel?

The Questions:

Did Citadel pressure Robinhood to restrict trading?
Did PFOF create incentives that harmed retail investors?
Can you trust a broker whose biggest customer is on the other side of your trades?

Congressional hearings followed, but PFOF remains legal.

How to Protect Yourself

Option 1: Choose a No-PFOF Broker

Best for: Serious investors, active traders, anyone with >$10k portfolio

Top Choices:

Interactive Brokers PRO - Best execution, direct market access
Fidelity - No PFOF, good for long-term investors
Vanguard - No PFOF, great for index investors

Option 2: Use Limit Orders

If stuck with a PFOF broker, never use market orders:

Set limit prices that are acceptable to you
Forces market makers to meet your price or pass
Reduces their ability to profit from information advantage

Option 3: Monitor Your Execution Quality

Check your trade confirmations:

Compare your execution price to the time-stamped NBBO
Calculate how much "price improvement" you actually got
Track whether you're consistently getting worse fills

Option 4: Demand Transparency

Brokers must disclose PFOF in quarterly 606 reports:

Search "[Your Broker] Rule 606 report"
See who they're selling your orders to
See how much they're getting paid

The Future of PFOF

Potential SEC Actions:

Mandatory auctions for retail orders before execution
Real-time disclosure of order routing decisions
Outright ban (like UK and EU)
Stricter best execution requirements

Industry Trends:

More brokers offering "PFOF-free" premium tiers
Increased competition among market makers
Growing retail investor awareness and backlash

The Bottom Line:

PFOF exists in a regulatory gray area. It's legal but controversial. As retail investors become more educated, pressure for reform will increase.

The Uncomfortable Truth

There's no such thing as a free lunch in financial markets.

When Robinhood, E-Trade, and Webull eliminated commissions, they didn't become charities. They shifted from charging you directly to selling your orders to the highest bidder. The commission didn't disappear—it just became invisible.

The Three Options:

1. Pay with worse execution (PFOF model)

"Free" trading
Broker makes money selling your orders
You lose money on execution quality
Total cost: $2-5 per trade in worse fills

2. Pay with commissions (No-PFOF model)

Transparent commission ($0.50-1 per trade)
Broker makes money from you directly
You get best execution
Total cost: $0.50-1 per trade

3. Pay with both (Ignorance)

Use PFOF broker
Place large market orders
Don't monitor execution quality
Total cost: $5-50 per trade

The Math Speaks:

For any serious investor, Option 2 is cheapest. The "free" option costs more.

Final Thoughts: Your Trading, Your Choice

Payment for Order Flow isn't illegal. It's not even necessarily unethical in all forms. But it represents a fundamental conflict of interest: your broker's biggest customers are the people trading against you.

The question isn't whether PFOF exists—it's whether you understand it and make informed choices.

Three Takeaways:

1. "Free" trading isn't free
You're paying in worse execution quality. The cost is hidden but real.

2. Not all brokers are the same
Some prioritize your execution quality. Others prioritize selling your orders. Choose accordingly.

3. Knowledge is power
Understanding PFOF helps you make better decisions about where to trade and how to place orders.

The Bottom Line

You are not the customer of "free" brokers. You are the product.

Your trades—your financial decisions, your timing, your strategies—are packaged up and sold to market makers who profit from trading against you. They pay billions for this privilege because it's worth it.

The good news? You have a choice.

You can trade on platforms that treat you as a customer and prioritize your execution quality. You can use limit orders to protect yourself. You can monitor your fills and demand better.

Or you can keep clicking "buy" on Robinhood, wondering why you always seem to get filled at exactly the worst price, while telling yourself it's "free."

The choice, as always, is yours.

Understanding how you're being sold is the first step to taking control of your investing. Choose wisely.

The Secret Behind Commission-Free Trading